Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate raises.

Question

Quizplus · Accepted Answer

According to the Fisher effect, an increase in the money supply growth rate would lead to a proportional increase in the nominal interest rate. However, since monetary neutrality holds, it implies that the real interest rate will remain unchanged. As a result of the increase in the money supply growth rate, there will be more money chasing the same goods and services, leading to an increase in the inflation rate. Therefore, the correct answer is B, as the inflation rate increases while real interest rates remain the same.

Suppose That Monetary Neutrality and the Fisher Effect Both Hold